As the Australian government negotiates a potential intergovernmental agreement (IGA) with the US in respect of the Foreign Account Tax Compliance Act (FATCA), Australian global financial institutions need to carefully consider the FATCA status of their offshore related entities and branches, and monitor it on an ongoing basis.
The commonly held misconception about an IGA is that it will provide a get-out-of-jail-free card for all Australian financial institutions from any FATCA withholding. But Australian institutions that have an offshore related entity or branch that is a “non-participating” foreign financial institution (FFI) may find that they will be subject to FATCA withholding, unless they procure that any such offshore entities and branches comply with specific rules set out in the IGA.
What does this mean in practice?
It will be critical that you consider the FATCA compliance status of all foreign branches and related entities (which includes subsidiaries, holding companies, and entities under “common control”).
This is because it may not be possible to isolate the impact of non-compliance with FATCA for a foreign branch or related entity in a particular jurisdiction to that jurisdiction. The non-compliance may result in the Australian financial institution losing the benefit of the proposed IGA.
Let’s take the example of an Australian financial institution with a branch or subsidiary in Hong Kong
An Australian financial institution that has a branch or subsidiary in Hong Kong needs to consider whether the FATCA status of the branch or subsidiary will taint its FATCA status under an Australian IGA. Hong Kong is not in the latest list of jurisdictions published by the US government that is currently in IGA negotiations.
If the Hong Kong branch or subsidiary is an FFI that has not signed an FFI agreement with the IRS or cannot rely on an exemption from FATCA, it will be a “non-participating FFI”. The result of being a “non-participating FFI” subsidiary or branch is that the Australian financial institution may not be able to take advantage of the benefit of the IGA. In order for the benefit of the IGA to be available, the Hong Kong branch or subsidiary must:
- identify its US accounts and reports information with respect to such accounts to the IRS, to the extent permitted under Hong Kong laws;
- not specifically solicit US accounts (other than those held by US persons resident in Hong Kong) or accounts held by non-participating FFIs that are not established in Hong Kong;
- identify itself to withholding agents as a “non-participating” FFI.
In addition, the Australian financial institution would need to treat the Hong Kong branch or subsidiary as a separate non-participating FFI for the purposes of all of the reporting and withholding requirements of the IGA. This means that if the Australian financial institution made a withholdable payment to its Hong Kong branch, it may need to make a FATCA withholding from such payment. This would be the case, for example, if it is a “qualified intermediary” for US tax purposes, or otherwise report on such payment to the immediate payer of such withholdable payment so that a FATCA withholding can be deducted at source.
The Australian financial institution also needs to make sure that it does not use its Hong Kong branch or subsidiary to circumvent its obligations under an Australian IGA or under the FATCA Regulations.
What if the Hong Kong branch or subsidiary does not comply with the Australian IGA requirements?
If the Australian financial institution and its Hong Kong branch or subsidiary does not comply with these requirements, the Australian financial institution would not be considered a ‘deemed compliant” financial institution under the IGA. Consequently, a FATCA withholding would be deducted from any withholdable payments and foreign pass-thru payments made to it.
The ultimate catch is that Australian domestic legislation will presumably nonetheless oblige the Australian financial institution to comply with the IGA obligations. This means that it would be left in the unenviable situation of having to meet the IGA due diligence and reporting obligations, but would nevertheless have FATCA withholdings deducted from withholdable payments made to it.
What about Australian branches/related entities of offshore global institutions?
Similarly difficult issues arise for Australian branches and related entities that are part of a broader global group. An Australian IGA will apply to all financial institutions located in Australia, including Australian branches of offshore financial institutions, and Australian implementing legislation will likely require compliance with the IGA.
For example, the Australian branch of a Chinese bank will be obliged under Australian law to comply with the Australian IGA requirements. This may create difficulties for the branch if its Chinese head office adopts a different approach to FATCA generally. Furthermore, the Australian branch will be subject to the same issues set out above in respect of its own offshore branches (including the Chinese head office) and related entities.
An IGA does not solve all FATCA problems
An IGA will certainly not solve all FATCA problems for Australian financial institutions and other entities subject to FATCA. Institutions with a global footprint need to carefully identify and monitor the FATCA status of their offshore related entities and branches to make sure that their status under an Australian IGA is not tainted or adversely impacted.